Money Market

Money Market

• Topics– Money Market

• Meaning and • Importance

– Introduction to Instruments of money markets– Introduction to

• Participants and Players of Money Markets.

Money Market Meaning and Importance

Money Market- Meaning

• Topics– Meaning– Characteristics– Functions/Importance

Money Market- Meaning

• The Money Market – – is a market for financial assets that are close

substitutes for money.– Is a market for overnight to short-term funds

and instruments having a maturity period of 1 or less than 1 year.

Money Market- Characteristics

– It is not a single market but a collection of markets of several instruments

– It is a wholesale market of short term instruments

– It is a need based market where the demand and supply of the money shape the market.

Money Market- Functions

• A Money Market is generally expected to perform the following functions :– It Caters to the short-term financial needs of the economy.– It helps the RBI in effecive implementation of monetary

policy.– It provides mechanism to achieve equilibrium between

demand and supply of short term funds.– It helps in allocation of short term funds through inter bank

transactions and money market instruments.– It facilitates economic development.

Money Market- Functions

• A Money Market function can be summarised as three broad functions

• Provide a balancing mechanism to even out the demand for and supply of short-term funds

• Provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy

• Provide reasonable access to suppliers and users of short term funds to fulfill their borrowings and investment requirements at an efficient market clearing price.

– A well functioning money markets facilitates the development of a market for a longer term securities. The interest rates for extremely short-term use of money serve as a benchmark for longer term financial instruments

Money Market Instruments

Money Market - Instruments

• The instruments traded in the Indian Money Market are– Treasury Bills(T-Bills)– Call/Notice Money Market – Call(overnight) and short

notice(upto 14days)– Commercial Papers(CPs)– Certificates of Deposits(CDs)– Commercial Bills(CBs)

• T-Bills, Call Money Market and CDs provide liquidity for government and banks while CPs and CBs provide liquidity for the commercial sector an intermediaries.

Money Market - Instruments

• Treasury Bills – are short term borrowing instruments issued by the

Reserve Bank on behalf of the government to tide over short-term liquidity shortfalls. This instrument is used by the government to raise short-term funds.

– T-Bills are repaid at par on maturity. It is a promise by the government to pay a stated sum after expiry of the stated period from the date of issue(91/182/364 days i.e. less than one year).

– They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

Money Market - Instruments• Call/Notice Money Market

– Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

Money Market - Instruments• Commercial Papers

– Commercial Papers are short-term unsecured borrowings by reputed companies that are financially strong and carry a high credit rating. These are sold directly by the issuers to the investors or else placed by borrowers through agents / brokers etc.

– CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument.

– CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces.

– CPs can be issued in both physical and demat form. When issued in the physical form CPs are issued in the form of Usance Promissory Note. CPs are issued in the form of discount to the face value.

Money Market - Instruments– A company shall be eligible to issue CP

provided – • the tangible net worth of the company, as per the last

audited balance sheet, is not less than Rs. 4 crore• Should have the working capital limit sanctioned by

a bank/FI• the borrowal account of the company is classified as

a Standard Asset by the financing bank/s. • Credit Rating not lower than P2 by CRISIL or its

equivalent – by Credit Rating Agency approved by RBI.

Money Market - Instruments• CP Features

– Commercial Papers when issued in Physical Form are negotiable by endorsement and delivery and hence highly flexible instruments

– Issued subject to minimum of Rs 5 lakhs and in the multiples of Rs. 5 Lakhs thereafter,

– Maturity is 15 days to 1 year– Unsecured promissory note and backed by

credit of the issuing company.

Money Market - Instruments• Commercial Bills

– CBs are negotiable instruments drawn by the seller on the buyer which are, in turn, accepted and discounted by commercial banks.

– A CB is a short-term, negotiable, and self liquidating instrument with low risk.

• Bills of Exchange– According to Indian Negotiable Instruments Act, 1881, a

bill of exchange is a written instrument containing an unconditional order, signed by the maker, directing to pay a certain amount of money to a particular person, or to the bearer of the instrument.

Money Market - Instruments• Bills of Exchange

– Are negotiable instruments drawn by the seller(drawer) on the buyer(drawee) for the value of goods delivered to him. Such bills are called trade bills.

– When trade bills are accepted by commercial banks, they are called Commercial Bills.

– The bank discounts this bill by keeping a certain margin and credits the proceeds. Banks when in need of money, can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI.

– The maturity period of the bills varies from 30 days, 60days or 90 days depending on the credit extended in the industry.

Money Market - Instruments• Certificate of Deposit(CD)

– Are unsecured, negotiable, short term instrument in bearer form, issued by commercial banks and development financial institutions.

– Are time deposits of specific maturity similar to Fixed Deposits(FDs). The biggest difference between the two is that CDs, being in bearer form, are transferable and tradable while FDs are not.

– CDs are issued at a discount to FV.

Money Market - Instruments• Features of CD

– All scheduled banks(except RRBs and Co-operative banks) are eligible to issue CDs.

– Issued to individuals, corporations, trusts and associations.

– They are issued at a discount rate freely determined by the issuer and the market/investor.

– Freely transferable by endorsement and delivery. At present CDs are issued in physical form.

Participants/Players ofMoney Market

Money Market – Players/Participants

• The money market in India is characterised by two segments – – Organised Segment– Unorganised Segment

– The principal participants in the organised segment are : • The Commercial and other Banks• Non Banking finance companies• Co-operative societies

Money Market – Players/Participants

– The principal participants in the unorganised money market are : • Money lenders• Indigenous banks• Nidhis(mutual loan associations)• Chit Funds

Money Market – Some Players/Participants

• The main Players/Participants of Money Markets are :– The Reserve Bank of India (RBI)– The Discount and Finance House of India (DFHI)– Mutual Funds– Insurance Companies– Banks– Corporate Investors– Non Banking Finance Companies (NBFCs)– State Governments– Provident Funds– Primary Dealers– The Securities Trading Corporations of India (STCI)– Public Sector Undertakings (PSUs)– Non Resident Indians.

Money Market – Introduction to Major Players/Participants

• Institutions – – The important institutions operating in the

money market are• Reserve Bank of India(RBI) – is the most important

participant in the money market which takes requisite measures to implement the monetary policy of the country. As the Central Bank, RBI regulates the money market in India and injects liquidity in the banking system, when it is deficient or contracts the same in the opposite situation.

Money Market – Introduction to Major Players/Participants

• Scheduled Commercial Banks - SCBs form the nucleus of money market. They are most important borrower/supplier of short term funds. They mobilise the savings of the people through acceptance of deposits and lend it to business houses for their short term working requirements. While a portion of these deposits is invested in medium and long term Government Securities and corporate shares and bonds, they provide short term funds to the Government by investing in the Treasury Bills.

• Financial and Investment Institutions – These institutions (eg. LIC, UTI, GIC, Development Banks etc.) have been allowed to participate in the call money market as lenders only.

Money Market – Introduction to Major Players/Participants

• Corporate – Corporate create demand for funds from the banking system. They raise short-term funds directly from the money market by issuing Commercial Papers. Moreover they accept public deposits and also indulge in inter-corporate deposits and investments.

• Mutual Funds – Mutual Funds also invest their surplus funds in various money market instruments for short periods. They are also permitted to participate in the Call Money Market. Money Market Mutual Funds Market have been setup specifically for the purpose of mobilisation of short term funds for investment in money market instruments.

Money Market – Introduction to Major Players/Participants

• Discount and Finance House of India(DFHI) – The DFHI Limited has been setup by the RBI jointly with the Public Sector Banks and all-India Financial Institutions to deal in short term money market instruments. At present DFHI participates in the inter-bank call/notice money market both as lender and borrower. It also rediscounts 182 Days Treasury bills, Commercial Bills, CDs and CPs.

Rohit Kochhar